Real Estate Finance & Mortgages Flashcards
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Read the first 6 Real Estate Finance & Mortgages flashcards as text
What is the difference between a fixed-rate and an adjustable-rate mortgage (ARM)?
Answer: A fixed-rate mortgage maintains the same interest rate throughout the loan; an ARM rate changes periodically based on market conditions
Fixed-rate mortgages lock in a constant interest rate for the entire loan term, providing payment predictability. ARMs start with a lower introductory rate that adjusts periodically based on a benchmark index.
What is a loan-to-value (LTV) ratio?
Answer: The percentage of a property's value that is financed by the mortgage
LTV is calculated by dividing the mortgage amount by the property's appraised value. An 80% LTV means the buyer is financing 80% of the value. Higher LTVs typically require private mortgage insurance (PMI).
What is private mortgage insurance (PMI)?
Answer: Insurance required when the down payment is less than 20%, protecting the lender against borrower default
PMI protects the lender (not the borrower) when the borrower puts down less than 20% of the purchase price. It can be cancelled once the LTV reaches 80% through payments or appreciation.
What is amortization in mortgage lending?
Answer: The gradual repayment of a loan through scheduled payments that include both principal and interest
Amortization is the process of paying off a loan over time through regular payments. Early payments are mostly interest; as the principal decreases, a larger portion of each payment goes toward principal.
What is a pre-approval letter?
Answer: A lender's written commitment stating the maximum loan amount a buyer qualifies for based on verified financial information
A pre-approval letter shows sellers that a buyer has been evaluated by a lender and qualifies for financing up to a specified amount, strengthening the buyer's offer in competitive markets.
What is the difference between a conventional loan and an FHA loan?
Answer: Conventional loans are not government-insured; FHA loans are insured by the Federal Housing Administration with lower down payment requirements
Conventional loans are private-market mortgages with stricter qualification requirements. FHA loans are government-insured, allowing lower down payments (3.5%) and more flexible credit requirements, making homeownership more accessible.